Friday, June 30, 2006

Calls of Note Part 1

Several firms are commenting on Apple Computer (NASDAQ:AAPL) this morning in light of "irregularities" regarding the issuance of stock option grants between 1997-2001 and reports of weakening iPod demand.

* Merrill Lynch notes that of the total number of options granted (adjusted for splits) to named executives, they find that 5% of options were granted at a share price that was less than 5% from the fiscal year low. Firm finds that 9% of option grants were less than 10% from the fiscal year low. These appear to be a small percent of overall executive option grants.

However, excluding options granted to Steve Jobs (which were priced at levels far above the fiscal year low), 15% of options were granted at a share price that was less than 5% from the fiscal year low and 24% of options were granted at a share price less than 10% from the fiscal year low. Perhaps these are the grants that may have triggered the internal investigation. Maintains Neutral rating.

* Piper Jaffray notes that of the 13 distinct option grants to senior management that were reported from FY97-FY01, they find one grant issued to Steve Jobs to be noteworthy. The firm has seen several other companies in their coverage space that have had options grants within 5% of, or at the low price for, the 40 days surrounding the grant date. From a high level, backdating options is the topic du jour, and this somewhat tarnishes Apple's squeaky clean image. However, it does not impact Apple's underlying fundamentals. They would view a pullback in shares as a buying opportunity ahead of what they believe will be favorable back-to-school and holiday periods for Apple.

* Banc of America is lowering their target price from $77 to $68, based on a lower target multiple. Firm believe thats Apple's transition from an iPod story to more balanced CPU and iPod story presents incremental risks. Based on channel checks and proprietary work, they have lowered iPod forecast and raised CPU growth rate estimates. Net firm's estimates increase by a small amount, from $2.38 in FY07 to $2.43. Believes that Apple's valuation is reasonable, but not on sale. Further, given their belief that street estimates remain in a range of reasonable to too high, they chosse to remain Neutral.

* Thomas Weisel Partners notes they just completed a round of 20 channel checks with Apple specialist resellers and Apple retail stores across the United States, and 90% of checks suggest strong demand for Intel-based Macs. Firm's checks suggest that half of the people visiting the stores are switchers and that there is pretty strong demand for MacBook and low-end MacBook Pro. Checks also indicate that most of the stores have received the shipments of Intel-based notebooks, so from a supply point of view, Apple is in a strong position from last quarter.

According to their checks, iPod nano remains a dominant MP3 player. Video iPod demand also appears to be solid, and this is perhaps due to the fact that customers who are looking for higher capacity iPods have no choice but to buy video iPod. Seventy percent of checks also indicate that overall demand for iPod has fallen off compared to the March quarter, however.No change to ests. Maintains Peer Perform.

Notablecalls: I don't see AAPL getting hit more than 1-2 pts on this options related issue. The weakness is iPods is alread well known.